FHA Insured Reverse Purchase Money Mortgages? I Just Gotta Rant!

So, have you had a request yet to close a Reverse Purchase Money Mortgage?  That’s right.  Reverse Mortgages can now be used for purchases.  These deals are now in the pipeline, so get ready to see them, coming soon to a closing table near you.  Let’s take a look at what they are, how they work and how you might want to approach them.

I remember the first time I saw a Reverse Mortgage, it made me a little queasy.  You know the theory of a traditional Reverse Mortgage; Mom & Dad or Grandma & Grandpa are sitting on equity in their home and want or need cash flow.  They can borrow against that equity without having to make any loan repayments as long as they live in the home.  Once the home is sold or the borrowers pass away, then the principal, interest and any fees become due.   Some of the early Reverse Mortgagors I saw didn’t seem quite certain of what they were doing, but after awhile the consumers seemed to be better educated and confident in their actions.  I came to realize there were some situations where a reverse mortgage was a good and needed product.

Well, now Mom & Dad or Grandma & Grandpa can purchase a home by using a Reverse Mortgage for a substantial amount of the purchase price.  Wrap your head around that one for just a minute! 

Here’s a snapshot of how it works, the lender calculates how much loan Mom & Dad and the property are eligible for (older is better when it comes to people and more expensive is better when it comes to property).  Mom & Dad borrow that amount via a Reverse Mortgage and pay the remainder of the purchase price in cash.  They make no monthly loan payments and when the home is sold or the borrowers pass away, then the interest, principal and fees become due in full.   You might wonder, “given what property values are doing these days, what happens if a home becomes ‘upside down’ under a reverse mortgage?”  These are FHA insured, so in that instance the lender applies to the FHA for reimbursement (the Mortgagor pays a 2% upfront MIP fee to FHA).

I’m backing away from an all out rant here … I’ll leave it to you to form your own conclusions.  You might think “what’s the difference between borrowing against equity in a home you own today versus a home you own tomorrow” or you might think “isn’t this counterintuitive if we are pushing consumers toward more “responsible borrowing”.  Either way, you’ll need some tools to understand these Home Equity Conversion Mortgages (HECMs) when they are used for purchase money.  The New York Times has a piece on it  and reversemortgageguides.org  has good information too, including some things the lenders might require at the closing table.

So what title products might these deals need?  Typically lenders only require a Reverse Mortgage Endorsement.  But there is usually a second mortgage filed for the FHA piece, so shouldn’t that have a policy also?  What about a Balloon Endorsement?  Or a Negative Am Endorsement?  All of these might not apply, they might not be possible in your state but you should check with your department of insurance and underwriter.  And what about your closing fee?  These are complex transactions by anyone’s estimation (including those who sell them).  Even the FHA MIP premium is higher than normal coming in at 2%.  Should you be closing these deals at the same price as a conventional purchase?  You decide, but I know what I would do!